Refresh...merchanting and intermediary trade transactions (‘transaction’). The key provisions or changes have been summarised below: Both the legs of the transaction should be

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Changing Regulatory

Landscape

Newsletter

Jan – Feb 2014

www.pwc.in

In this Issue

Corporate Regulations 04

Sectoral Regulations 10 Financial Services

Broadcasting Sector

Electronics Policy

Perspective 14

Glossary 17

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The FIPB meeting

Some of the interesting cases recently discussed in the FIPB meetings have been classified under the

following sectors:

The government has approved (being the first in this segment) a proposal by a foreign company to

acquire through purchase and subscription 50% of the equity share capital of an Indian company

engaged in the multi brand retail trading of products.

An existing pharma company has been specifically approved to issue shares to its parent company

against fresh inflow of capital in the company.

A few proposals involving NR to NR transfer including the transfer of shares to its group company

were approved by the FIPB even though a three year lock in period was subsisting as applicable in

the construction development business.

A proposal for the issue of equity shares against transfer of immovable assets of the Indian Liaison

Office in India was also approved.

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Corporate regulations

FDI

Valuation norms for instruments with options

With a view to liberalise the FDI policy, the RBI

has permitted Indian companies to issue shares

(equity or preference) or convertible debentures

containing an optionality clause to foreign

investors.

These instruments can however be issued only if

the non-resident investor is not guaranteed any

assured exit price. Further, the exit needs to

comply with the following requirements:

Minimum lock in period: One year or

the lock in period as may be applicable

under the sectoral guidelines, whichever is

longer.

Pricing guidelines:

Instrument Pricing guidelines

Equity shares

Of a listed company

At the market price

determined on the floor of the

recognised stock exchanges

Of an unlisted company

At a price not exceeding that

arrived at on the basis of RoE

as per the latest audited

balance sheet. RoE for this

purpose shall mean profit

after tax or net worth,

whereby the net worth will

include all free reserves and

paid up capital

Preference

shares or

debentures

At a price worked out as per

any internationally accepted

pricing methodology at the

time of exit, duly certified by

a Chartered Accountant or a

SEBI registered Merchant

Banker

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Further, it is provided that all the existing

contracts will have to be amended in order to

comply with the conditions prescribed above.

Source: Notification No FEMA 294/2013 dated 12

November 2013 notified vide G.S.R No. 805(E) dated 30

December 2013 and A.P. (DIR Series) Circular No.86 dated

9 January 2014

Issue of non-convertible or redeemable bonus

preference shares or debentures to non-

residents from the general reserve under a

Scheme of Arrangement approved by a court

With a view to rationalise and simplify the

procedures, the RBI has permitted Indian

companies to issue non-convertible or

redeemable preference shares or debentures as a

bonus to the non-resident equity shareholders

including the depositories that act as trustees for

the ADR or the GDR holders.

However, this needs to be by way of distribution

as a bonus from its general reserve under a

Scheme of Arrangement approved by a court in

India under the provisions of the Companies

Act. Further, no-objection from the Income Tax

Authorities will be required.

The RBI has clarified that the issuance of

preference shares (non-convertible or

redeemable preference shares) and convertible

debentures (optionally convertible or partially

convertible debentures) otherwise than by way

of bonus will continue to be governed by ECB

regulations.

A.P. (DIR Series) Circular No. 84 dated 6 January 2014

Foreign investment in India: Participation in

credit enhanced bonds

The RBI has allowed the SEBI registered foreign

institutional investors, qualified foreign

investors as well as the long-term investors

registered with SEBI viz sovereign wealth funds,

multilateral agencies, pension, insurance or

endowment funds and foreign central banks to

invest in the credit enhanced bonds up to a limit

of 5 billion USD within the overall limit of 51

billion USD earmarked for corporate debt.

A.P. (DIR Series) Circular No.74 dated 11 November 2013

ODI

Rollover of guarantees

In August 2013, the RBI had reduced the ceiling

for overseas investment (equity, loan and

guarantees) by an Indian entity from 400% of its

net worth to 100%.

It has now clarified that the renewal or rollover

of an existing or original guarantee, which is

already a part of the total financial commitment

of the Indian party, will not be treated as a fresh

financial commitment for evaluating the above

units if the following key conditions are

satisfied:

The existing or original guarantee was

issued in terms of the prevailing FEMA

guidelines

There is no change in the end use of the

guarantee, ie the facilities availed by the JV,

WOS or the step down subsidiary

There is no change in the terms and

conditions of the guarantee (including the

amount) except the validity period

Rollover of the guarantee will continue to be

reported as a fresh financial commitment in

Part II of Form ODI

In case, all conditions stated in the circular are

not met, the Indian party will need to obtain

prior RBI approval for the rollover or renewal of

the existing guarantee.


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ECB

ECB for SPVs in infrastructure

Under the extant ECB guidelines, utilisation of

ECB proceeds for on-lending or investment in

the capital market including investment in SPVs

or acquiring a company (or a part thereof) in

India is prohibited.

The RBI, with a view to strengthen the flow of

resources to the infrastructure sector, has now

permitted raising ECB for project use in SPVs in

the infrastructure sector under the automatic

route or approval route, whichever the case may

be. The following are the key features of this

window:

Eligible borrower: Holding companies or

CICs coming under the regulatory

framework of the RBI

End use: Project use in SPVs established

extensively for implementing the project in

this sector1

The SPV can use ECB proceeds for fresh

capital expenditure or refinancing of the

existing Rupee loans availed from the

domestic banking system for capital

expenditure (refinancing permissible under

the approval route subject to existing limits,

viz, 40% of ECB raised for the power sector

and 25% for other infrastructure sectors).

Undertaking by SPV: No other method of

funding, such as, trade credit (if for import

of capital goods), etc. will be utilised for that

portion of the fresh capital expenditure

financed through ECB proceeds

1 ‘Infrastructure sector’ is defined to include energy, communication, transport, water and sanitation, social and commercial infrastructure, mining, exploration and refining. The detailed definition of ‘infrastructure sector’ can be found in RBI’s A.P. (DIR Series) Circular No.48 dated 18 September 2013.

Escrow account: ECB should be parked in

a separate escrow account pending

utilisation

Time line: ECB can be raised up to three

years after the commercial operations date

of the SPV

Additional conditions for CICs coming under the

regulatory framework of the RBI:

Leverage ratio: The prescribed leverage ratio

needs to be complied with outside liabilities

including ECB should be less than 2.5 times

their adjusted net worth as on the date of the

last audited balance sheet.

Hedging: For CICs with an asset size below

100 crore INR, ECB availed should be on a

fully hedged basis.

While these amendments will be effective

immediately, all other aspects of extant ECB

guidelines remain unchanged.

A.P. (DIR Series) Circular No. 78 dated 3 December 2013

Liberalisation of the definition of infrastructure

The RBI has expanded the ambit of the

transport sector of infrastructure for the

purpose of ECB by including ‘MRO’ as a part of

airport infrastructure.

Accordingly, MRO services which are seperate

from the related infrastructure services will be

considered as part of the airport sub-sector in

the transport sector of infrastructure and will

thereby be eligible to avail ECB both under the

automatic route or approval route.

Source: A.P. (DIR Series) Circular No. 85 dated

6 January 2014

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Conversion of payable or liability into equity

The RBI has issued the following clarification in

connection with the conversion of any foreign

currency denominated payables or liabilities by

an Indian company such as ECB, lumpsum fees,

royalties, etc, into equity shares:

Exchange rate to be applied for conversion

can be the rate prevailing on the date of the

agreement between the concerned parties

Based on a mutual agreement with the

lender, the Indian company is free to issue

equity shares of a rupee amount less than

that arrived as above

Fair value of the equity shares to be issued

needs to be calculated with reference to the

date of conversion only

A.P. (DIR Series) Circular No.94 dated 16 January 2014

Exchange control

Import and export of goods and services

The RBI has amended the guidelines relating to

merchanting and intermediary trade

transactions (‘transaction’). The key provisions

or changes have been summarised below:

Both the legs of the transaction should be

routed through the same AD bank

Entire transactions should be completed

within an overall period of nine months

(which was six months earlier) and the

foreign exchange outlay should not be

beyond four months (which was three

months earlier).

It has been clarified that the

commencement of the transaction will be

the date of shipment / export leg receipt or

import leg payment, whichever is earlier

and the completion date will be the date of

shipment / export leg receipt or import leg

payment, whichever is the later

Short-term credit either by way of suppliers'

credit or buyers' credit has now been made

available for transactions including the

discounting of the export leg LC by an AD

bank

Merchanting traders have to be genuine

traders of goods and not mere financial

intermediaries and should earn reasonable

profits while undertaking such transactions

Inward remittance from the overseas buyer

should preferably be received first and the

outward remittance to the overseas supplier

should be made subsequently. Alternatively,

an irrevocable LC should be opened by the

buyer in favour of the merchant, on the

strength of which the merchant in turn may

open a LC in favour of the overseas supplier

Advance receipt against the export leg may

be held in a separate deposit or current

account in foreign currency or INR and

should be earmarked till the payment of

import

Advance against the import leg if demanded

by the overseas seller, should be paid

against a bank guarantee from an

international bank of repute

A.P. (DIR Series) Circular No. 95 dated

17 January 2014

Establishment of LO, BO, PO in India

It has been notified that the citizens of Hong

Kong or Macau will require approval of the RBI

for establishing an LO, BO, PO or any other

place of business in India. Earlier, this

restriction applied only to citizens of Pakistan,

Bangladesh, Sri Lanka, Afghanistan, Iran and

China.


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Joint bank accounts maintained by residents in

India with non residents

Presently, a non-resident close relative (relatives

as defined in Section 6 of the Companies Act,

1956) of resident individuals can be the joint

holder of a resident savings bank accounts on a

‘former or survivor’ basis. Such non-resident

Indian close relatives are however, not eligible

to operate the account during the life time of the

resident account holder.

The RBI has permitted NRIs to operate such

accounts on ‘Either or Survivor’ basis subject to

compliance with the prescribed conditions.


Retention of foreign assets u/s 6(4) of FEMA:

Clarification

A person resident in India is permitted to hold,

own, transfer or invest in foreign currency,

foreign security or any immovable property

situated outside India if such currency, security

or property was acquired, held or owned by such

a person when he was resident outside India or

was inherited from a person who was resident

outside India.

The RBI has clarified that the following aspects

will be covered under this permission:

Foreign currency accounts opened and

maintained by such a person when he was

non-resident

Income earned through

- Employment or, business or vocation

outside India taken up or commenced

while such person was non-resident, or

- Investments made while such a person

was a non-resident

- Gift or inheritance received while such a

person was resident outside India;

Foreign exchange including any income

arising therefrom and conversion or

replacement or accrual to the same, held

outside India by a person resident in India

and acquired by way of inheritance from a

person resident outside India.

A person resident in India can freely utilise all

their eligible assets abroad as well as the income

from such assets or the sale proceeds thereof

received after their return to India for making

any payments or to make any fresh investments

abroad without approval of the RBI. However,

the cost of such investments and any subsequent

payments received therefore need to be met

exclusively out of the funds forming part of

eligible assets held by them.

Further, the transaction should not be in

contravention to the extant FEMA provisions.


Borrowing and lending in Rupees: Investments

by persons resident outside India in tax free,

secured, redeemable, non-convertible bonds

Regulation No. 6 (2) of the Foreign Exchange

Management (borrowing and lending in

Rupees) Regulations, 2000 strictly imposes

restrictions on a person resident in India who

has borrowed in Rupees from a person resident

outside India. The borrowed funds cannot be

used for any investment, whether by way of

capital or any other form in any company or

partnership firm or proprietorship concern or

any entity which is in existence or not for

relending purposes.

It has been decided to permit such resident

entities / companies in India which are

authorised by the government, to issue tax-free,

secured, redeemable, non-convertible bonds in

Rupees to persons resident outside India to use

such borrowed funds for the following purposes:

lending / re-lending to the infrastructure

sector

keeping in fixed deposits with banks in

India pending utilization by them for

permissible end-uses

A.P. (DIR Series) Circular No.81 dated 24 December 2013

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Company Law

Clarification with regard to holding of shares

or exercising power in a fiduciary capacity:

Holding and subsidiary relationship under

Section 2(87) of the Companies Act, 2013

Section 4(3) of the Companies Act, 1956 states

that “in determining whether one company is a

subsidiary of another, any shares held or power

exercisable by that other company in a fiduciary

capacity shall be treated as not held or

exercisable by it”.

Following the notification of the definition of a

‘subsidiary company’ under Section 2(87) of the

Companies Act, 2013, the MCA had received a

number of representations seeking clarity on

whether the shares held or power exercisable by

a company in a ‘fiduciary capacity’ will be

excluded while determining if a particular

company is a subsidiary of another company.

The stakeholders had further pointed out that in

terms of Section 4(3) of the Companies Act,

1956, such shares or powers were excluded from

the purview of the holding-subsidiary

relationship.

MCA has examined this position and has

recently clarified that the shares held by a

company or power exercisable by it in another

company in a 'fiduciary capacity' shall not be

included for the purpose of determining the

holding-subsidiary relationship in terms of the

provision of Section 2(87) of the Companies Act,

2013.

MCA Circular 20/2013 dated 27 December2013

Objections of the Income Tax Department to be

considered by the RD in cases involving

arrangement, compromise, reconstruction or

amalgamation:

The RD, while filing a report under Section

394 of the Companies Act, 1956 on behalf of

the central government shall invite specific

comments from the Income Tax

Department within 15 days of the receipt of

notice to the Central Government. Further,

these comments will be required to be

projected in the RD’s representation on

behalf of the central government.

If no response from the Income Tax

Department is forthcoming, it may be

presumed that the Income Tax Department

has no objection to the action proposed

under Section 391 or 394, whichever the

case may be.

The Regional Director must also see if in a

particular case, feedback from any other

sectoral regulator has to be obtained and if

it appears necessary for him to obtain such

feedback, it should also be dealt with in a

similar manner.

General Circular No.1/ 2014 dated 15 January 2014

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Sectoral regulations

Financial services

SEBI (FPI) Regulations, 2014 Dated 9 January

2014

SEBI has notified SEBI (FPI) Regulations, 2014

to put in place a framework for registration and

procedures with regard to the foreign investors

which propose to make portfolio investment in

India.

The key features of the said regulation are:

Every person who buys, sells or otherwise

deals in securities as FPI will have to obtain

a certificate of registration with the

depository participant.

A qualified foreign investor may continue to

buy, sell or otherwise deal in securities

subject to the provisions of these

regulations, for a period of one year from

the date of commencement of these

regulations, or until he obtains a certificate

of registration as a foreign portfolio

investor, whichever is earlier.

A foreign institutional investor may, subject

to payment of conversion fees as specified in

regulation, continue to buy, sell or otherwise

deal in securities till the expiry of the

registration as a foreign institutional

investor or until he obtains a certificate of

registration as FPI, whichever is earlier.

FPIs have been broadly categorised as

follows:

- Category I: Includes foreign

governments and government related

foreign investors

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- Category II: Includes regulated broad-

based funds, regulated entities and

broad-based funds that are not

regulated but whose investment

manager is appropriately regulated,

university funds, university-related

endowments and pension funds

- Category III: All others not eligible

under the first two categories

The designated depository participant shall

endeavor to dispose the application for the

grant of certificate of registration as soon as

possible within thirty days.

The registration granted by the designated

depository participant on behalf of the

board under these regulations shall be

permanent unless suspended or cancelled

by the board or surrendered by the FPI.

Designated depository participant

- Should be recognised and approved by

SEBI

- Can be a custodian of securities who is

registered with the board on the date of

commencement of these regulations.

Such custodians shall be deemed to

have been granted approval as a

designated depository participant

- Can be a qualified depository

participant which has been granted

approval by the board prior to the

commencement of these regulations.

Such a participant shall be deemed to

have been granted approval as a

designated depository participant

FPIs will be allowed to invest in securities in the

primary and secondary markets. These will

include units of schemes floated by the domestic

mutual funds, treasury bills, dated government

securities, commercial papers, and Indian

depository receipts, among others.

Illustrative format of the Statement of Assets

and Liabilities in SEBI (ICDR) Regulations,

2009

SEBI has updated the illustrative format of the

Statement of Assets and Liabilities to be

provided in the offer document as prescribed

under Regulation - (2)(IX)(B)(9)(f) of Part-A of

Schedule VIII of SEBI (ICDR) Regulations,

2009 and brought in line with the requirements

of the Companies Act, 1956 and Companies Act,

2013. The key features of the said circular are:

The revised format for disclosure of the

Statement of Assets and Liabilities in the

offer document is in Annexure A to the

Circular No. CIR/CFD/DIL/15/2013 dated

3 December 2013.

The circular is applicable for all draft as well

as final offer documents filed with the board

on or after the date of this circular.

It may be noted that the necessary

amendments to SEBI (ICDR) Regulations,

2009 are being carried out, post which this

circular will stand rescinded.

Circular No. CIR/CFD/DIL/15/2013 dated

3 December 2013

Simplification of the demat account opening

process:

SEBI has simplified and rationalised the demat

account opening process to protect the interests

of investors in securities and to promote the

development of and to regulate the securities

markets. The key features of the said circular

are:

The existing Beneficial Owner-Depository

Participant agreements shall be replaced

with a common document ‘Rights and

Obligations of the Beneficial Owner and

Depository Participant’. This document

shall be mandatory and binding for all the

existing as well as the new clients and

depository participants.

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The depository participant shall provide a

copy of this document to the beneficial

owner and shall take an acknowledgement

of the same. They shall ensure that any

clause in any voluntary document neither

dilutes their responsibility nor shall it be in

conflict with any of the clauses in this

circular, rules, bye-laws, regulations,

notices, guidelines and circulars issued by

SEBI and the depositories from time to

time. Any such clause introduced in the

existing as well as new documents shall

stand null and void.

Circular No. CIR/MIRSD/12/2013 dated 4 December 2013

SEBI (Investor Protection and Education Fund)

(Amendment) Regulations, 2014 dated 9

January 2014

SEBI has notified SEBI (Investor Protection And

Education Fund) (Amendment) Regulations,

2014 to amend the SEBI (Investor Protection

and Education Fund) Regulations, 2009.

The board has inserted the following After-

Clause (e) in Regulation 4 of SEBI (Investor

Protection and Education Fund) Regulations,

2009:

(f) Amounts forfeited for non-fulfilment of

obligations specified in regulation 15B of

the SEBI (Buy-back of Securities)

Regulations, 1998;

(g) Monies transferred in accordance with

Sub-Regulation (9) of Regulation 45 of

SEBI (Issue of Capital and Disclosure

Requirements) Regulations, 2009;

(h) Amounts disgorged under Section 11B of the

Act or Section 12A of the Securities

Contracts (Regulation) Act, 1956 or Section

19 of the Depositories Act, 1996.

Broadcasting

Consultation paper on ‘Migration of FM Radio

Broadcasters from Phase II to Phase III’

TRAI has released a consultation paper on

‘Migration of FM Radio Broadcasters from

Phase II to Phase III’. MIB had sent a reference

dated 9 April 2013 to the authority, seeking

recommendations of TRAI on the same.

The consultation paper has been prepared to

seek the comments and views of the

stakeholders on:

Date of migration from Phase II to Phase III

Duration of permission after migration

from Phase II to Phase III

Methodology for charging a migration fee

from the existing operators on their

migration from Phase II to Phase III

Directions issued to multi-system operators/

local linked cable operators

TRAI, in order to protect the interest of

consumers has issued certain directions to the

multi-system operators as well as local linked

cable operators. Some of these directions

include:

offering cable TV services to their

subscribers on both pre-paid and post-paid

payment options and generate bills

providing an itemised bill on regular basis

to every subscriber

submitting a compliance report by the 31

December 2013 for the areas of the

National Capital Territory of Delhi,

Municipal Council of Greater Mumbai and

Kolkata Metropolitan area

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Electronics policy

Electronics Policy 2012

Amendment to M-SIPS guidelines

The DeiTY offers a package of incentives to

attract domestic and global investments into the

ESDM sector. One such initiative is the M-SIPS

under which financial incentives, both on the

capex and in the form of reimbursement of

excise and duties is available when the

investment exceeds a specified threshold.

The M-SIPS guidelines currently suggest that if

the proposed project includes manufacturing

one or more electronic products routed through

a single initial application, the applicable

threshold will be sum of the thresholds required

to manufacture each of the products separately.

As per a recent amendment to the

aforementioned guidelines (dated 23 December

2013), it has been stated that incase the same

manufacturing set up or production line is used

to manufacture more than one electronic

products falling under verticals with different

thresholds, the applicable threshold will be of

the vertical which has the highest threshold.

However, if the manufacturing set up for the

proposed products are significantly different,

the applicable threshold will be sum of the

thresholds required to manufacture each of the

products separately.

Notification of brownfield EMC

One of the main impediments in the way of

attracting investments for manufacturing

semiconductors, components and electronic

products is the lack of availability of good and

reliable infrastructure. With a view to correct

this disability, the government has decided to

offer financial support for the development of

EMCs. The financial assistance will be available

to both greenfield as well as brownfield EMCs.

All units within the aforementioned areas which

are located within industrial estates or an area

approved by state, central or local government

or municipal authorities for industrial purpose

will be eligible for M-SIPS benefits.

As per a recent notification (dated 23 December

2013), the following brownfield clusters have

been notified. These brownfield EMCs are

generic in nature and include all verticals of

ESDM.

S no State Location or district

1 Haryana District Gurgaon

2 Himachal

Pradesh

Block Kandaghat

3 Block and Urban Body

Area, Solan

4 Block, Dharampur

5 Block, Nalagarh

6 Urban Body Area,

Nalagarh

7 Urban Body Area, Baddi

8 Urban Body Area,

Parwanoo

9 Kerala District

Thiruvananthapuram

10 District Alappuzha

11 Maharashtra District Pune

12 Rajasthan District Jaipur

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Perspective

Regulatory environment for electronic

prepaid payment instruments in India: A

paradigm shift?

Payment systems in India have undergone

major changes over the last decade. The rising

adoption of internet and mobiles, a young and

dynamic population, the emergence of multiple,

innovative business models and the launch of

the revolutionary Aadhaar program have all

contributed to a widespread adoption of

electronic payment instruments. The Indian

electronic payments market is still relatively

nascent. With the exception of credit and debit

cards, innovative products such as pre-paid

instruments, electronic and mobile wallets and

e-commerce are just making their way into the

marketplace.

A sound legal system is particularly important

for electronic payment instruments, wherein

transactions are conducted virtually., via digital

channels. To that end, a number of legislations

find application in the operation of payment

systems in India. The PSS Act played a

significant role in ushering the era of electronic

payments in the country. The Act provided a

legal definition for payment systems and

settlement procedures, and established the RBI

as the designated authority for the regulation

and supervision of all payment systems in the

country. The legal authority provided by this Act

61.60

28.96

0.35

Composition of Prepaid Instrument transaction volumes

(millions): 2013-14

m-wallets

Prepaid cards (gift cards and others)

Paper vouchers (meal vouchers)

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enabled the RBI to formulate regulatory

guidelines that were broadly in line with its

vision of fostering electronic payment systems

and promoting the idea of a society less

dependent on cash.

Since the notification of the PSS Act, the RBI

has released a number of specific guidelines for

credit cards, remittance products and prepaid

payment instruments, among others.

PPI guidelines: An overview

The PPI guidelines were first released by the

RBI in April 2009 and aimed at developing a

regulatory framework to ensure that the PPI

segment developed in a prudent and customer

friendly manner. These guidelines defined the

types of PPIs as well as stakeholders involved in

the issue and operation of PPIs, categorised

PPIs according to their nature of usage and laid

down the eligibility criteria for persons or

entities seeking to gain a license to issue and

operate PPI systems.

The guidelines classified PPIs under the

following three categories:

Closed system PPIs: These are primarily

used within a merchant establishment and

do not permit cash-withdrawal. As these

instruments cannot be used at third-party

stores and are essentially of a closed-loop

nature, they are not regulated by the RBI.

For example: Gift vouchers issued by

Shoppers’ Stop, Lifestyle, etc.

Semi-closed system PPIs: These are

redeemable at a group of merchant

establishments that have partnered with

the issuer for acceptance of the instrument

and cannot be used for cash withdrawal.

These instruments can be issued up to a

maximum of 50,000 INR based on the

prescribed KYC norm fulfilment (limited

and full KYC).

For example: Mobile wallets provided by

telcos (Airtel Money, M-pesa, mRupee),

digital wallets (ItzCash, Paymate), gift

cards (Qwikcilver), etc.

Open system PPIs: These are acceptable at

any merchant establishment that accepts

cards, and permit cash withdrawal. Only

banks are allowed to issue open system

PPIs.

For example: Prepaid cards issued by Axis

Bank, ICICI Bank etc.

In addition, such guidelines have been issued

and strengthened from time to time to build the

confidence of public and merchant

establishments. For instance, non-banks are

mandated to hold customer funds in an escrow

account with their principal banks and observe

strict compliance with the escrow management

to ensure timely settlement of claims.

Furthermore, by way of installing adequate

safeguards against money laundering risks, the

RBI guidelines require transaction monitoring

or caps on remittance values, and checks to

prevent multiple purchases of PPIs.

Challenges faced by the PPI segment

In the face of the regulatory restrictions on the

‘cash-out’ facility, semi-closed PPIs, especially

mobile wallets, found limited usage in the

country resulting in limited adoption. In order

to overcome this restriction to some degree, the

telecom companies formed partnerships with

banks, in order to create a separate segment of

mobile wallets. These mobile wallets can

facilitate cash withdrawal at business

correspondent or agent outlets, thereby

providing flexibility to customers, especially the

migrant labourers.

There have been a number of other issues

around the cost structure, distribution network

and existing regulatory framework on escrow

account mechanism. The proactive policy

makers are however, endeavouring to address

these challenges over a period of time and

transform prepaid instruments into preferred

instruments for use on a daily basis. The

planned pilot project for enabling cash out (for

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semi-closed PPIs) with biometric identification

and the adoption of e-KYC are some of these

steps in the right direction.

Payment banks: Divergent future for

PPI?

The recently released Nachiket Mor Committee

Report on financial inclusion proposes a

revolutionary future for the payments

ecosystem, wherein specialised banks

(christened ‘Payment Banks’) take the lead to

provide payment services across the length and

breadth of the country. Under this model, all the

existing as well as new PPI providers (with

minimum capital base of 50 crore INR) will have

to apply for a payment bank license under the

Banking Regulations Act and no further PPI

licenses will be issued. These payment banks are

expected to provide various payment services,

deposit services, follow compliances and enjoy

privileges of the scheduled commercial banks.

However, they will not be allowed to take any

credit risks and therefore, will have to use their

deposits to invest in short-term government

securities (with the tenure not exceeding three

months) and other approved SLR securities.

Seven years after the passage of the Payments

and Settlement Systems Bill, industry players

are still constantly tweaking their business plans

to fulfil regulatory and market requirements.

The market models are still evolving as the

industry participants seek to find the one best

suited for the Indian scenario. The regulatory

environment too is undergoing significant

transformation. The impact of the divergent

upcoming regulatory changes cannot be

ascertained at present. However, these

developments do raise open questions such as

what will be the FDI norms and the licensing

requirements for payment banks.

All such questions lead to one significant

question: Do these recent indications of a shift

in regulatory attitudes signal a paradigm shift

for the PPI industry?

- Amit G Jain (Manager, Regulatory Services)

17 PwC

Glossary

AD Authorised dealer

BO Branch office

CCPS Compulsorily convertible preference share

DC Development commissioner

DEA Department of Economic Affairs

DeiTY Department of Electronics and Information Technology

DGFT Directorate General of Foreign Trade

DIPP Department of Industrial Policy and Promotion

DoC Department of Commerce

DTA Domestic tariff area

EHTP Electronic hardware technology park

EMC Electronics manufacturing cluster

EOU’s Export oriented units

ESDM Electronics Systems Design and Manufacturing

FCCB Foreign currency convertible bond

FDI Foreign direct investment

FEIs Foreign educational institutions

FEMA Foreign Exchange Management Act

FIIs Foreign institutional investors

FIPB Foreign Investment Promotion Board

FPI Foreign portfolio investor

FY Financial year

GDR Global depository receipt

ICDR Issue of capital and disclosure requirements

INR Indian Rupee

IT Information technology

JV Joint venture

LC Letter of credit

LO Liaison office

LoA Letter of approval

MBRT Multi-brand retail trading

MCA Ministry of Corporate Affairs

MIB Ministry of Information and Broadcasting

MoC Ministry of Commerce

MRO Maintenance, repairs and overhaul

M-SIPS Modified special incentives package scheme

NRI’s Non resident Indians

ODI Overseas direct investments

PIB Press Information Bureau

PO Project office

PPI Prepaid payments instruments

PSS Act Payment and Settlement Systems Act of 2007

R&D Research and development

RBI Reserve Bank of India

RD Regional Director

RoE Return on equity

SBRT Single brand retail trading

SEBI Securities Exchange Board of India

SEZ Special economic zone

SPV Special purpose vehicle

UAC Unit approval committee

USD United States dollar

WOS Wholly owned subsidiary

Contacts Ahmedabad

President Plaza, 1st Floor Plot No 36

Opp Muktidham Derasar

Thaltej Cross Road, SG Highway

Ahmedabad, Gujarat 380054

Phone +91-79 3091 7000

Bangalore

6th Floor, Millenia Tower 'D'

1 & 2, Murphy Road, Ulsoor,

Bangalore 560 008

Phone +91-80 4079 7000

Chennai

8th Floor, Prestige Palladium Bayan

129-140 Greams Road,

Chennai 600 006

Phone +91 44 4228 5000

Hyderabad

#8-2-293/82/A/113A Road no. 36,

Jubilee Hills, Hyderabad 500 034,

Andhra Pradesh

Phone +91-40 6624 6600

Kolkata

56 & 57, Block DN.

Ground Floor, A- Wing

Sector - V, Salt Lake.

Kolkata - 700 091, West Bengal, India

Phone +(91) 033 - 2357 9101 / 4400 1111

Mumbai

PwC House, Plot No. 18A,

Guru Nanak Road - (Station Road),

Bandra (West), Mumbai - 400 050

Phone +91-22 6689 1000

Gurgaon

Building No. 10, Tower - C

17th & 18th Floor,

DLF Cyber City, Gurgaon

Haryana -122002

Phone : +91-124 3306 6000

Pune

GF-02, Tower C,

Panchshil Tech Park,

Don Bosco School Road,

Yerwada, Pune - 411 006

Phone +91-20 4100 4444

This report does not constitute professional advice. The information in this report has been obtained or derived from sources believed by

PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or

estimates contained in this report represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this report are advised to

seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this report.

PwCPL neither accepts or assumes any responsibility or liability to any reader of this report in respect of the information contained within it or for any decisions

readers may take or decide not to or fail to take.

© 2014 PricewaterhouseCoopers Private Limited. All rights reserved. “PwC”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited

company in India) or, as the context requires, other member firms of PwC International Limited, each of which is a separate and independent legal entity.

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Documents

Refresh...merchanting and intermediary trade transactions (‘transaction’). The key provisions or changes have been summarised below: Both the legs of the transaction should be